01 Sep Election year and GDP
Not that interesting. Or is it…
It’s election year, so *sigh* politicians of all stripes are being even more economical with the truth than usual. One of the subjects getting thrown around is: who is better with the economy.
Numerous politicians have suggested that the nation’s debt is too high and that they are the only ones that can be trusted to turn it around. We’re politically ambivalent (we dislike everyone equally who has held the baubles of power), but at this point, we think it worth highlighting 2 things. Firstly, the previous government increased government debt quite significantly. And secondly, the current government has done exactly the same – increase government debt quite significantly (25.1 billion in the 2025 year). So neither side of the isle have a great recent record.
Depending on which statistician you believe, NZ’s debt to GDP ratio is somewhere around 45 – 50% in the most recent financial year. Sounds scary. However, on the world stage, we are rank amateurs. Indeed, the global average is more like 100% debt to GDP. Check out this world debt clock if you want to fell better about your credit card balance.
There are a few nations that have received a lot of attention for the size of their debt, relative to their economic output. None more so than the USA. Again, depending on your source, their debt to ratio is somewhere around 130% and rising. Part of the reason that this has garnered so much attention is because of the risk this imposes upon the worldwide economy if interest rates rise. And spoiler, interest rates might be rising.
Why’s this important?
There are better explanations as to why attempts to get the increasing interest rates on government debt aren’t going all that well, and more importantly, why USA government bond yields (the amount of interest the USA government pays on the money it borrows) matter to interest rates in little old New Zealand. The short version is; if USA government bond yields increase, interest rates in NZ increase.
In a number of economies (including USA, Australia and NZ) inflation is still elevated. Indeed, many businesses and households are facing ongoing price increases. This week, the Reserve Bank is due to look at NZ’s official cash rate. They certainly have a lot to think about. At the risk of sounding like doom merchants, we agree with the trading banks; the Reserve Bank will most likely bump up the official cash rate, so interest rates will likely move higher over time.
We don’t point all of this out to cast shade on any particular political party (see above, we dislike them all), and we think interest rates are a blunt instrument, so we aren’t huge fans of whacking rates up as the sole means of controlling inflation. However, after what has been financially a very uncertain 6 years, it looks like certainty is decreasing. Plan accordingly.
